Exam 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions

A parcel of corporate land was recently dedicated as the new plant site. What cost allocation should the land receive, based on the following: original cost of $200,000, highest market value during time of ownership of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

It is easy to imagine that a financial manager would be reluctant to abandon a project in which large sums of money have been invested with no cash return. Discuss the important concept here that should be the manager's guiding policy.

What is the NPV of a project that costs $100,000, provides $23,000 in cash flows annually for 6 years, requires a $5,000 increase in net working capital, and depreciates the asset straight-line over 6 years while ignoring the half-year convention? The discount rate is 14%.

Opportunity costs are evaluated for investment decisions at their historical cost.

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

Discounting real cash flows with real interest rates provides an overly optimistic idea of a project's value.

Which one of the following is least likely to influence the opportunity cost of an asset?

Capital budgeting analysis focuses on cash flow as opposed to profits.

Which one of the following would be more apt to make an unacceptable project appear acceptable?

What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income, $75,000 in depreciation expense, and a 35% marginal tax rate?

When a depreciable asset is ultimately sold, the sales price is:

Corporate income statements are designed primarily to show:

A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net working capital increased?

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

A tax shield is equal to the reduction in a firm's:

Which one of the following is a situation where a new project will require a cash investment in net working capital?

What are the three methods of calculating operating cash flow?